2Practice - Optional Practice Problems Project Evaluation...

[1] Optional Practice Problems Project Evaluation Problem #1 Consider the following projects: Cash Flows ($) PROJECT C 0 C 1 C 2 C 3 C 4 C 5 A -1,000 +1,000 0 0 $500 0 B -2,000 +1,000 +1,000 +1,000 +2,000 0 C -3,000 +1,200 +1,000 0 +1,000 +500 a. If the opportunity cost of capital is 10%, which projects have a positive NPV? b. Calculate the IRR for each project. c. Calculate the Payback Period for each project. Problem #2 As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $50,000. Its operating costs are $20,000 a year, but in five years the machine will require a $20,000 overhaul. Thereafter operating costs will be $30,000 until the machine is finally sold in year 10 for $5,000. The older machine could be sold today for $25,000. If it is kept, it will need an immediate $20,000 overhaul. Thereafter operating costs will be $30,000 a year until the machine is sold in year 5 for $5,000.

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